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The Reserve Bank's August forecasts had the economy growing by just 1.4 per cent over 2026, a deliberately modest pace that sits at the centre of its plan to bring inflation down.

Economic growth is usually treated as something to maximise. In the Reserve Bank of Australia's current thinking, a slower pace is part of the plan.

The RBA's August 2026 Statement on Monetary Policy forecast GDP growth of 1.4 per cent over the year to December 2026. That is a subdued figure, and the central bank has been open about why it sees a period of slower demand growth as necessary.

In her opening statement to the House of Representatives Standing Committee on Economics on 18 September, Governor Michele Bullock put it directly: "A period of subdued growth of aggregate demand is needed to reduce capacity pressures and bring inflation down sustainably."

Why the RBA wants demand to grow slowly

The logic starts with inflation. The August monthly CPI indicator showed headline inflation of 4.0 per cent over the year, while underlying inflation, measured by the trimmed mean, has been about 3.5 per cent for the past six months, according to the Governor. Both are above the RBA's 2–3 per cent target range, where it aims for the 2.5 per cent midpoint.

"Inflation is too high," Bullock told the committee. "We are focused on getting it back down and making sure that it does not become embedded."

When demand in the economy runs ahead of what it can comfortably supply, businesses face pressure on capacity, and that can feed into prices. The Governor's phrase "capacity pressures" refers to that strain. Slowing the growth of demand is the mechanism through which higher interest rates are meant to ease it.

On 29 September, the Monetary Policy Board raised the cash rate target by 25 basis points to 4.60 per cent, its fourth increase of 2026. Bullock said at her media conference that the full effect of rate changes "can take 12, perhaps even 18 months", which suggests the effects of this year's increases may still be working through.

What the September statement said about growth

The 1.4 per cent figure was a forecast made in August. The Board's September statement offered a more recent read on how the economy was tracking, and the picture was mixed.

  • Growth higher than expected. The statement said recent data suggest growth and inflation in Australia have been higher than expected.
  • Consumer spending easing. It also said: "There are signs that growth in consumer spending is easing gradually as expected."
  • Business investment strong. "Growth in business investment and debt is strong," the Board said.

Part of that investment strength is linked to technology. The statement said "AI-related demand is driving rapid growth in global prices for technology-related goods", and Bullock said at her media conference that "The global AI investment boom has driven significant price rises for some inputs within the AI supply chain." Deputy Governor Andrew Hauser, speaking on ABC's 7.30 on 8 September, described AI spending as a "fairly conventional investment boom", noting that to generate the benefits "you first have to put in place the kit".

Energy prices have also moved. The Board said "global energy prices are now much higher than had been assumed in the August forecasts". That means some of the conditions underpinning the 1.4 per cent forecast have shifted. Updated forecasts are due in the November Statement on Monetary Policy on 3 November.

Subdued, not a recession

A subdued pace of growth is not the same as a contraction, and the Governor has drawn that line. Asked about the risk of recession at her 29 September media conference, Bullock said: "That is not our central base case at this moment."

The labour market helps illustrate the balance the RBA is trying to strike. Bullock said the unemployment rate "has risen from 3.5 per cent over the past couple of years to 4.6 per cent", and that over a million jobs had been created over that period. She added: "The unemployment rate is still quite low historically, and we still think the labour market is a little bit tight."

The August outlook said: "The unemployment rate is forecast to increase to 4.8 per cent by the end of 2028." That is a gradual rise, consistent with an economy growing slowly rather than sharply contracting.

Hauser has also tied the RBA's approach to jobs. "We're doing it in order to try to protect the jobs gains that happened during COVID," he said on 7.30.

The Governor acknowledged that the path is not easy for borrowers. "I know this decision is difficult for households with a mortgage and businesses with loans," she said. She also noted that scheduled mortgage payments, including interest, are back up to around 10 per cent of household disposable income.

The supply side of the story

There is another way to read the 1.4 per cent figure. Slower demand growth is one way to close the gap between what the economy wants to buy and what it can produce. The other is for the economy's capacity itself to grow faster.

Bullock has been blunt about the second option. At her media conference she said productivity is "doing nothing" and that "the supply side of the economy has to grow."

That comment frames the forecast in a different light. The RBA's tool, the cash rate, works mainly on demand. It cannot directly lift productivity. As long as the supply side is not growing quickly, a subdued pace of demand growth is part of how the bank expects inflation to come down.

The Governor has also stressed that wages are not the problem. "There is no wage price spiral going on in Australia. Rises in wages are not driving these cost pressures," she said.

What to watch next:

  • 13 October: minutes of the September meeting.
  • 28 October: the next CPI update.
  • 3 November: the cash rate decision and the November Statement on Monetary Policy, with new growth forecasts.

The bottom line

The RBA's forecast of 1.4 per cent growth over 2026 is modest by design. The Governor told parliament that "a period of subdued growth of aggregate demand is needed" to bring inflation down sustainably, while ruling out recession as the bank's central case. Recent data suggest growth has been stronger than expected, consumer spending is easing gradually and business investment remains strong. Whether the 1.4 per cent figure holds will become clearer when the RBA publishes new forecasts on 3 November.